Market Overview

JAKKS Pacific Reports Fourth Quarter and Full Year 2018 Financial Results

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JAKKS Pacific, Inc. (NASDAQ:JAKK) today reported financial results for
the fourth quarter and full-year ended December 31, 2018.

Fourth Quarter 2018 Overview vs. Same Period Last Year:

  • Net sales were $132.3 million compared to $136.6 million reported in
    the prior year period. Excluding net sales to Toys "R" Us of $1.3
    million and $19.6 million in 2018 and 2017, respectively, net sales
    increased in 2018 by 12% on a year-over-year basis.
  • Gross margin was 30.6%, up from 22.1% in 2017.
  • Net loss attributable to JAKKS was $3.2 million, or $0.14 per basic
    and diluted share vs. net loss attributable to JAKKS of $30.4 million,
    or $1.33 per basic and diluted share in 2017.
  • Adjusted EBITDA was negative $1.6 million, compared to negative $6.8
    million in 2017. See note below on "Use of Non-GAAP Financial
    Information."

Fiscal 2018 Overview vs. Same Period Last Year:

  • Net sales were $567.8 million compared to $613.1 million reported in
    the prior year period. Excluding net sales to Toys "R" Us of $16.6
    million and $69.4 million in 2018 and 2017, respectively, net sales
    increased in 2018 by 1% on a year-over-year basis.
  • Gross margin was 27.4%, up from 25.4% in 2017.
  • Net loss attributable to JAKKS was $42.4 million, or $1.83 per basic
    and diluted share vs. net loss attributable to JAKKS of $83.1 million,
    or $3.89 per basic and diluted share in 2017.
  • Adjusted EBITDA was $2.3 million, compared to $15.8 million in 2017.
    See note below on "Use of Non-GAAP Financial Information."

Management Commentary

"We are pleased that despite the considerable industry-wide disruption
caused by the liquidation of Toys ‘R' Us, we were able to deliver
positive adjusted EBITDA for the full year," said Stephen Berman, CEO of
JAKKS Pacific. "New licensed properties such as Incredibles 2, Harry
Potter and Fancy Nancy, as well as our properties such as Morf Board,
Perfectly Cute® and TP Blaster®, performed very well during the 2018
fourth quarter. We made good progress on our goals of expanding
international sales and increasing the portion of our sales generated
through online retailers, and we believe that we are better positioned
entering 2019."

2019 Outlook

Our goal for 2019 is to grow sales by approximately 5% on a
year-over-year basis with improved levels of Adjusted EBITDA.

Cash and Cash Equivalents

The Company's cash and cash equivalents, including restricted cash,
totaled $58.2 million as of December 31, 2018, compared to $57.1 million
at September 30, 2018 and $65.0 million at December 31, 2017.

Status of Meisheng Expression of Interest

As of the date hereof, the Company believes that it is in the final
stages of negotiations with Hong Kong Meisheng Cultural Company Limited
("Meisheng"), an ad hoc group of holders (the "Ad Hoc Group") of the
4.875% convertible senior notes due 2020 (the "Notes") issued by the
Company and Oasis Investments II Master Fund Ltd. ("Oasis") with respect
to a $50 million equity infusion to be made by Meisheng into the Company
resulting in Meisheng owning 51% of the Company's outstanding shares. No
executed and binding agreements (including any commitment letter, term
sheet, or similar agreement) have been reached, however, with Meisheng,
any member of the Ad Hoc Group, any other holder of the Notes or Oasis.
Based on the most recent negotiations with the Ad Hoc Group and Oasis,
and discussions between the Company and Meisheng, the Company
anticipates that the terms for the Company's post-transaction
capitalization will involve an exchange by participating noteholders of
the Notes for new secured notes due 2024 (the "New Notes"), in the same
amount as the outstanding principal of the exchanged Notes (together
with accrued and unpaid interest), with interest at 8% per annum, and
payment-in-kind interest of an additional 2.5% per annum, plus warrants
for 15% of the Company's outstanding shares at a nominal exercise price
(and which would provide anti-dilution protection under certain
circumstances). It is anticipated that the holders of the New Notes
would be granted a security interest in the same collateral that secures
the Company's existing revolving credit facility. In respect to the
3.25% convertible senior notes due 2020 (the "Oasis Notes") issued to
Oasis on November 7, 2017 and July 26, 2018, the terms under discussion
include amendment of the Oasis Notes to, among other things, extend
their maturity to 2024, and provide for payment-in-kind interest of an
additional 2.75% per annum. The foregoing is only a summary of the
latest discussions and is not intended to be a complete description of
all of the terms and conditions thereof, including the potential
significant additional dilution that could occur as a result of the
anti-dilution provisions contemplated by these transactions under
certain circumstances. No assurance can be given that the ongoing
discussions will result in consummation of a transaction with Meisheng,
the holders of the Notes or Oasis, or that even if a transaction is
consummated that its final terms will resemble the terms described above.

Use of Non-GAAP Financial Information

In addition to the preliminary results reported in accordance with U.S.
GAAP included in this release, the Company has provided certain non-GAAP
financial information including Adjusted EBITDA which is a non-GAAP
metric that excludes various items that are detailed in the financial
tables and accompanying footnotes reconciling GAAP to non-GAAP results
contained in this release. Management believes that the presentation of
these non-GAAP financial measures provides useful information to
investors because the information may allow investors to better evaluate
ongoing business performance and certain components of the Company's
results. In addition, the Company believes that the presentation of
these financial measures enhances an investor's ability to make
period-to-period comparisons of the Company's operating results. This
information should be considered in addition to the results presented in
accordance with GAAP, and should not be considered a substitute for the
GAAP results. The Company has reconciled the non-GAAP financial
information included in this release to the nearest GAAP measures. See
the attached "Reconciliation of Non-GAAP Financial Information."

Conference Call Live Webcast

JAKKS Pacific will webcast its fourth quarter earnings call at 4:30 p.m.
Eastern Time / 1:30 p.m. Pacific Time today. To listen to the live
webcast and access the accompanying presentation slides, go to www.jakks.com/investors
and click on the earnings website link under the Presentations tab at
least 10 minutes prior to register, download and install any necessary
audio software.

A replay of the call will be available on the JAKKS Pacific, Inc.
website approximately one hour following completion of the call through
March 5, 2019 ending at 11:59 p.m. Eastern Time / 8:59 p.m. Pacific
Time. The playback can be accessed by calling (888) 843-7419 or (630)
652-3042 for international callers. The passcode is "4819 9182#" for
both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. (NASDAQ:JAKK) is a leading designer, manufacturer
and marketer of toys and consumer products sold throughout the world,
with its headquarters in Santa Monica, California. JAKKS Pacific's
popular proprietary brands include Perfectly Cute™, Squish-Dee-Lish™,
Disguise®, Moose Mountain®, Funnoodle®, Maui®, Kids Only!®; a wide range
of entertainment-inspired products featuring premier licensed
properties; and C'est Moi™, a youth skincare and make-up brand. Through
JAKKS Cares, the company's commitment to philanthropy, JAKKS is helping
to make a positive impact on the lives of children. Visit us at www.jakks.com and
follow us on Instagram (@jakkstoys),
Twitter (@jakkstoys)
and Facebook (JAKKS
Pacific
).

©2019 JAKKS Pacific, Inc. All rights reserved.

Forward Looking Statements

This press release may contain "forward-looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) that
are based on current expectations, estimates and projections about JAKKS
Pacific's business based partly on assumptions made by its management.
These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such statements due to numerous factors,
including, but not limited to, those described above, changes in demand
for JAKKS Pacific's products, product mix, the timing of customer orders
and deliveries, the impact of competitive products and pricing, and
difficulties with integrating acquired businesses, or closing the
Meisheng and recapitalization transactions. The "forward-looking
statements" contained herein speak only as of the date on which they are
made, and JAKKS undertakes no obligation to update any of them to
reflect events or circumstances after the date of this release.

 
JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
         

December 31,

December 31,

  2018     2017  
(In thousands)
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 53,282 $ 64,977
Restricted cash 4,923 -
Accounts receivable, net 122,278 142,457
Inventory 53,880 58,432
Prepaid expenses and other assets   15,780     16,803  
Total current assets 250,143 282,669
 
Property and equipment 128,049 141,357
Less accumulated depreciation and amortization   107,147     118,130  
Property and equipment, net 20,902 23,227
 
Goodwill 35,083 35,384
Intangibles and other assets, net   36,713     29,069  
Total assets $ 342,841   $ 370,349  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable and accrued expenses $ 87,488 $ 92,061
Reserve for sales returns and allowances 29,403 17,622
Short term debt, net   27,211     26,075  
Total current liabilities 144,102 135,758
 
Long term debt, net 139,792 133,497
Other liabilities 4,409 4,537
Income taxes payable 1,458 1,261
Deferred tax liability, net   1,431     783  
Total liabilities 291,192 275,836
 
Stockholders' equity:
Common stock, $.001 par value 30 27
Additional paid-in capital 218,155 215,809
Treasury stock (24,000 ) (24,000 )
Accumulated deficit (127,601 ) (85,233 )
Accumulated other comprehensive loss   (15,847 )   (13,059 )
Total JAKKS Pacific, Inc. stockholders' equity 50,737 93,544
Non-controlling interests   912     969  
Total stockholders' equity   51,649     94,513  
Total liabilities and stockholders' equity $ 342,841   $ 370,349  
 
 

JAKKS Pacific, Inc. and Subsidiaries
Condensed Statements of Operations (Unaudited)
           
Three Months Ended December 31, Year Ended December 31,

2018

2017

2018

2017

(In thousands, except per share data) (In thousands, except per share data)
 
Net sales $ 132,326 $ 136,628 $ 567,810 $ 613,111
Less cost of sales
Cost of goods 71,356 79,395 319,788 343,408
Royalty expense 19,040 26,301 81,794 102,781
Amortization of tools and molds   1,444     772     10,512     11,241  
Cost of sales   91,840     106,468     412,094     457,430  
Gross profit 40,486 30,160 155,716 155,681
Direct selling expenses 16,565 21,117 54,851 56,566
Selling, general and administrative expenses 24,382 32,927 123,722 138,895
Depreciation and amortization 1,646 1,816 6,569 9,762
Goodwill and other intangibles impairment - - - 13,536
Restructuring charge 1,114 880 1,114 1,080
Acquisition related and other   1,197     -     1,633     -  
Income (loss) from operations (4,418 ) (26,580 ) (32,173 ) (64,158 )
Other income (expense):
Income from joint ventures - - 227 105
Other income (expense), net (152 ) 50 152 342
Loss on extinguishment of convertible senior notes - (919 ) (453 ) (919 )
Write-off of investment in DreamPlay LLC - - - (7,000 )
Change in fair value of convertible senior notes 5,462 - 2,948 -
Interest income 21 11 68 37
Interest expense   (3,013 )   (2,333 )   (10,243 )   (9,829 )
Income (loss) before provision for (benefit from) income taxes (2,100 ) (29,771 ) (39,474 ) (81,422 )
Provision for (benefit from) income taxes   1,243     716     2,951     1,606  
Net income (loss) (3,343 ) (30,487 ) (42,425 ) (83,028 )
Net income (loss) attributable to non-controlling interests   (96 )   (74 )   (57 )   57  
Net income (loss) attributable to JAKKS Pacific, Inc. $ (3,247 ) $ (30,413 ) $ (42,368 ) $ (83,085 )
Income (loss) per share - basic $ (0.14 ) $ (1.33 ) $ (1.83 ) $ (3.89 )
Shares used in income (loss) per share - basic   23,106     22,799     23,104     21,341  
Income (loss) per share - diluted $ (0.14 ) $ (1.33 ) $ (1.83 ) $ (3.89 )
Shares used in income (loss) per share - diluted   23,106     22,799     23,104     21,341  
 
 

JAKKS Pacific, Inc. and Subsidiaries
Reconciliation of
Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:

This press release and accompanying schedules provide certain
information regarding Adjusted EBITDA and Adjusted Net Income (Loss),
which may be considered non-GAAP financial measures under the rules of
the Securities and Exchange Commission. The non-GAAP financial measures
included in the press release are reconciled to the corresponding GAAP
financial measures below, as required under the rules of the Securities
and Exchange Commission regarding the use of non-GAAP financial
measures. We define Adjusted EBITDA as income (loss) from operations
before depreciation, amortization and adjusted for certain non-recurring
and non-cash charges, such as reorganization expenses and restricted
stock compensation expense. Net income (loss) is similarly adjusted and
tax-effected to arrive at Adjusted Net Income (Loss). Adjusted EBITDA
and Adjusted Net Income (Loss) are not recognized financial measures
under GAAP, but we believe that they are useful in measuring our
operating performance. We believe that the use of the non-GAAP financial
measures enhances an overall understanding of the Company's past
financial performance, and provides useful information to the investor
by comparing our performance across reporting periods on a consistent
basis.

Investors should not consider these measures in isolation or as a
substitute for net income, operating income, or any other measure for
determining the Company's operating performance that is calculated in
accordance with GAAP. In addition, because these measures are not
calculated in accordance with GAAP, they may not necessarily be
comparable to similarly titled measures employed by other companies.

   
Three Months Ended December 31, Year Ended December 31,

2018

 

2017

2018

 

2017

(In thousands) (In thousands)
 
Net income (loss) $ (3,343 ) $ (30,487 ) $ (42,425 ) $ (83,028 )
Income from joint ventures - - (227 ) (105 )
Other (income) expense, net 152 (50 ) (152 ) (342 )
Loss on extinguishment of convertible senior notes - 919 453 919
Interest income (21 ) (11 ) (68 ) (37 )
Interest expense 3,013 2,333 10,243 9,829
Provision for (benefit from) income taxes 1,243 716 2,951 1,606
Depreciation and amortization 3,090 2,588 17,081 21,003
Acquisition related and other 1,197 - 1,633 -
Restricted stock compensation expense 687 859 2,434 3,112
Goodwill and other intangibles impairment - - - 13,536
Write-off of investment in DreamPlay LLC - - - 7,000
Bad debt write-offs (recoveries) (3,242 ) 1,600 8,722 11,212
Inventory impairment - 5,231 - 9,600
Change in fair value of convertible senior notes (5,462 ) - (2,948 ) -
Restructuring charge 1,114 880 1,114 1,080
Minimum guarantee shortfalls   -     8,575     3,468     20,461  
 
Adjusted EBITDA $ (1,572 ) $ (6,847 ) $ 2,279   $ 15,846  
 
 
Three Months Ended December 31, Year Ended December 31,

2018

2017

2018

2017

(In thousands, except per share data) (In thousands, except per share data)
 
Net income (loss) attributable to JAKKS Pacific, Inc. $ (3,247 ) $ (30,413 ) $ (42,368 ) $ (83,085 )
Restricted stock compensation expense 687 859 2,434 3,112
Loss on extinguishment of convertible senior notes - 919 453 919
Bad debt write-offs (recoveries) (3,242 ) 1,600 8,722 11,212
Acquisition related and other 1,197 - 1,633 -
Change in fair value of a convertible senior notes (5,462 ) - (2,948 ) -
Minimum guarantee shortfalls - 8,575 3,468 20,461
Goodwill and other intangibles impairment - - - 13,536
Write-off of investment in DreamPlay LLC - - - 7,000
Inventory impairment - 5,231 - 9,600
Restructuring charge 1,114 880 1,114 1,080
Tax impact of additional charges   304     (681 )   (1,439 )   (2,489 )
 
Adjusted net income (loss) attributable to JAKKS Pacific, Inc. $ (8,649 ) $ (13,030 ) $ (28,931 ) $ (18,654 )
 
Adjusted income (loss) per share - basic $ (0.37 ) $ (0.57 ) $ (1.25 ) $ (0.87 )
Shares used in adjusted income (loss) per share - basic   23,106     22,799     23,104     21,341  
Adjusted income (loss) per share - diluted $ (0.37 ) $ (0.57 ) $ (1.25 ) $ (0.87 )
Shares used in adjusted income (loss) per share - diluted   23,106     22,799     23,104     21,341  

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